Order Execution Quality Research Articles

How do block orders affect trade premium and order execution quality on the Taiwan stock exchange?

AbstractThis research investigates how block orders affect trade premium and order execution quality across trader types in Taiwan's order‐driven call market. Foreign investors place buy‐side block orders at a smaller premium compared to individuals, while submitting sell‐side block orders at a smaller discount than individuals. Block orders tend to have longer order duration but lower fill rates. Domestic institutions themselves complete their orders faster than individuals do. Foreign investors have better market‐timing capabilities either for buying or selling block orders and thus obtain shorter order duration but higher fill rate.

Transaction fees: Impact on institutional order types, commissions, and execution quality

Market participants and regulators are debating maker–taker pricing and whether fees split between limit and market orders impact routing and execution quality. Contrary to existing theory, my model predicts this split impacts gains from trade. When rebates increase, liquidity suppliers post more aggressive quotes. Given limit order fill rates, gains from trade fall as commissions increase with fees. Should institutional investors choose market orders with greater probability, fill rates increase and adverse selection decreases. As rebates are realized more frequently, commissions fall, increasing gains from trade in size and frequency. Empirical patterns in SEC Rule 605 confirm my testable predictions.

Non-Conflicted Trader “Maker-Taker” Decisions and Execution Quality

Under U.S. equity transaction-based pricing systems, prior research suggests retail brokers (i.e., conflicted traders) maximize their order flow payments at the expense of their client limit order execution quality. In our study, we examine order type decisions for those who execute their own orders (i.e., non-conflicted traders) and the relation between trading rebates-fees and execution quality. Similar to the conflicted, non-conflicted traders make routing decisions that generate rebates for both limit and marketable orders; but these strategies do not result in consistently lower execution quality dimensions. Our results suggest that higher order flow payments can coincide with higher execution quality.

Retail Order Execution Quality under Zero Commissions

Using rule 605 reports from major market makers that receive retail order flow, we examine the impact of zero-commission trades on order execution quality. We find that the effective spread for marketable orders between 100 and 499 shares marginally decreased following the zero-commission cut. We also find that realized spreads increased and adverse selection decreased for market makers relative to exchanges. Consistent with better alignment of incentives between brokers and market makers, our results suggest that the elimination of commissions for retail investors improved execution quality for orders directed to third-party market makers.

Do (Should) Brokers Route Limit Orders to Options Exchanges That Purchase Order Flow?

AbstractWe examine whether options exchanges’ pricing schedules affect broker order routing behavior and limit order execution quality. We find that some brokers seemingly maximize the value of their order flow by selling marketable orders and sending nonmarketable orders to exchanges that offer large liquidity rebates. Other brokers appear to bypass liquidity rebates by routing both marketable and nonmarketable orders to exchanges that purchase order flow. Using a decision by the Philadelphia Stock Exchange (PHLX) to change its trading protocol, we provide empirical evidence that brokers can enhance limit order execution quality by routing nonmarketable limit orders to options exchanges that purchase order flow.

Order Cancellations, Fees, and Execution Quality in U.S. Equity Options

Abstract We examine the effects of an order cancellation fee on limit order flow and execution quality in the PHLX options market. The cancellation fee on professional order flow effectively reduces the rate at which limit orders are canceled. Whereas the cancellation fee discourages the submission of nonmarketable orders, it encourages the submission of marketable orders. Consequently, nonmarketable order fill rates increase; marketable order fill speeds decrease; and bid-ask spreads widen. We also find slight increases in both dollar volume and market share. (JEL G11, G14, G18) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Price limit changes and market quality in the Taiwan Stock Exchange

This study examines the relationships between price limit changes and market quality in the Taiwan Stock Exchange taking into account limit hits, order choices, and firm characteristics. Specifically, we investigate whether price limit changes affect firm-level market quality and firm-trader-level order execution quality. Our analysis yields several findings as follows. After the price limit changes, stock traders alter their order choices significantly by increasing order aggressiveness and decreasing trade size, with the firm-level market quality changing as well. In particular, both time-weighted spread and intraday volatility increase significantly, market depth decreases, and order execution quality (i.e., order duration and fill rate) is enhanced. In terms of trader types, professional investors have better order execution quality than other institutions and individuals.

Trading aggressiveness, order execution quality, and stock price movements: Evidence from the Taiwan stock exchange

We examine the relationships among stock traders’ trading aggressiveness, order execution quality, and stock price movements in the Taiwan Stock Exchange. Our analyses yield the following findings. Institutional investors have a lower level of trading aggressiveness than individuals. In terms of order immediacy, investment trusts and foreign investors tend to pay higher (lower) prices to buy (sell) stocks. Professional institutions spend much shorter time completing trades per order (<6 min), but obtain higher fill rates (about 99%) than other institutions and individuals. In addition, professional institutions tend to make smart decisions, earning profits for buy orders while reducing losses for sell orders.

Order Cancellations, Fees, and Execution Quality in U.S. Equity Options

We examine the effects of an order cancellation fee on limit order flow and execution quality in the PHLX options market. The cancellation fee on professional order flow is effective in reducing the rate at which limit orders are canceled. While the cancellation fee discourages the submission of non-marketable orders, it encourages the submission of marketable orders. Consequently, non-marketable order fill rates increase, marketable order fill speeds decrease, and bid-ask spreads widen. We also find slight increases in both dollar volume and market share. We explore whether a change in pick-off risk is a potential explanation for these new findings and policy implications.

PRICE DISCOVERY OF INTERNATIONALLY CROSS‐LISTED STOCKS DURING THE 2008 FINANCIAL CRISIS

AbstractStudies of cross‐listings show home markets dominate price discovery and point to informational advantages of local investors. However, we show price discovery gravitates to markets with better order execution quality and find home markets do not dominate price discovery. Instead, price discovery is more evenly split, especially for emerging markets. Order execution quality determines the dominant market as price discovery shifts 22% when order execution advantages reverse between home and foreign markets. Thus, markets with poor execution quality act more as satellite markets, adjust to more liquid markets, and play a diminished role in the pricing of cross‐listed stocks.

Make-Take Fees versus Order Flow Inducements: Evidence from the NASDAQ OMX PHLX Exchange

Exchange competition across U.S. options exchanges facilitates the tailoring and frequent modification of fees to attract particular order flow. We examine whether the maker-taker model or the payment for order flow (PFOF) model offers superior limit order execution quality. On the PHLX exchange, a set of select option classes recently changed pricing models from maker-taker to PFOF. We conduct difference-in-difference tests that suggest that options on stocks that change fee structures exhibit an improvement in limit order execution quality, including an increase in order fill rates, a decrease in order cancellation rates, and faster fills. We do, however, find that limit order volume, in terms of the number of orders submitted, declines following the change to PFOF pricing. Thus, our results seem to suggest that limit order traders on the PHLX exchange are made better off following the change in select options classes from maker-taker to PFOF.

Can Brokers Have It All? On the Relation between Make‐Take Fees and Limit Order Execution Quality

ABSTRACTWe identify retail brokers that seemingly route orders to maximize order flow payments, by selling market orders and sending limit orders to venues paying large liquidity rebates. Angel, Harris, and Spatt argue that such routing may not always be in customers’ best interests. For both proprietary limit order data and a broad sample of trades from TAQ, we document a negative relation between several measures of limit order execution quality and rebate/fee level. This finding suggests that order routing designed to maximize liquidity rebates does not maximize limit order execution quality and thus brokers cannot have it all.

LOST IN TRANSLATION: WHICH STOCK PRICES BEAR THE BURDEN TO ADJUST TO EXCHANGE RATES?

AbstractWe examine the role of competing exchanges to restore price parity following currency shocks during 2008, a year characterized by dramatic currency volatility. Burdens on the NYSE and home market to restore price parity for cross‐listed stocks are more dynamic than previously thought. Adjustments in NYSE prices are not uniform across stocks, are often less than home market adjustments, and are strongly influenced by differences in order execution quality. We quantify the effect of currency shocks using a three‐system error correction model, and show that currency shocks exert independent and profound effects as prices gravitate to restore price parity.

Lost in Translation: Which Stocks Bear the Burden to Adjust to Exchange Rates?

We examine the role of competing exchanges to restore price parity following currency shocks during 2008, a year characterized by dramatic currency volatility. Burdens of the NYSE and home market to restore price parity for cross-listed stocks are more dynamic than previously thought. Adjustments in NYSE prices are not uniform across stocks, often are less than home market adjustments, and are strongly influenced by differences in order execution quality. We quantify the effect of currency shocks using a 3-system vector error correction model, and show that currency shocks exert independent and profound effects as prices gravitate to restore price parity.

The Effect of Maker-Taker Fees on Investor Order Choice and Execution Quality in U.S. Stock Markets

Equity exchanges competing for orders are using new pricing strategies. Typically, liquidity suppliers are compensated and liquidity demanders are charged. This pricing structure is controversial because of its potential effects on investor order choice, market quality, trader welfare, and economic efficiency. I develop a theoretical model of maker-taker fees in the presence of a broker and equity exchanges and test the model empirically using order level data from SEC Rule 605. The broker charges investors a commission and endogenously chooses to route orders to a dealer or equity exchange. The exchanges keep a portion of the taker fee as profit and pass the remaining amount to the broker as a maker rebate when its order providing liquidity executes. The theoretical model predicts that as the taker fee and maker rebate increase, holding constant the amount kept as profit by the exchange: (1) the bid-ask spread declines, (2) the total trading cost increases, (3) the trader participation falls, (4) the proportion of marketable order shares rises, and (5) the non-marketable limit order fill rate increases. These implications are different from those of the model by Colliard and Foucault (2012), because my model implies that changes in the split of trading fees between liquidity suppliers and demanders affect order choice and thereby execution quality. I find empirical evidence consistent with my model’s predictions. In particular, as the taker fee and maker rebate increase, holding constant the amount kept as profit by the exchange: (1) the bid-ask spread declines, (2) the trader participation falls, (3) the proportion of marketable order shares rises, and (4) the non-marketable limit order fill rate increases.

Can Brokers Have It All? On the Relation between Make Take Fees &amp; Limit Order Execution Quality

We identify retail brokers that seemingly route orders to maximize order flow payments: selling market orders and sending limit orders to venues paying large liquidity rebates. Angel, Harris, and Spatt (2011) argue that this type of routing may not always be in customers’ best interests. For both proprietary limit order data and a broad sample of trades from TAQ, we document a negative relation between several measures of limit order execution quality and rebate/fee level. This finding suggests that order routing designed to maximize liquidity rebates does not maximize limit order execution quality and, thus, brokers cannot have it all.

Transparency and Market Quality: An Analysis of the Effect of MiFID on Euronext

MiFID is the latest and most important European Directive in the area of market micro-structure. It came into force as an important step toward the creation of a competitive and efficient capital market. Although the implementation of this Directive was largely overshadowed by the recent financial crisis - whose effects we can still observe - this study aims to provide some insights into the impact of MiFID on the performance and quality of Euronext. Using a large sample of publicly listed companies in Europe, this empirical research examines the effect of pre-trade and post-trade transparency on market and order execution quality. The study measures, first, market quality in terms of efficiency (return volatility, return auto-correlation, and FITC) and liquidity (quoted spread, turnover and number of transactions). Secondly, the study investigates order execution quality using the EBEX indicator. The empirical results show, after controlling for some variables, an improvement in certain dimensions of market quality for most liquid stocks and a better order execution quality after MiFID implementation.

Speed, Distance, and Electronic Trading: New Evidence on Why Location Matters

We examine the execution quality of electronic stock traders who are geographically dispersed throughout the U.S. Traders who are located further away from market central computers in the New York City area experience slower order execution and higher trading costs. The negative relation between execution quality and trader distance is robust to various factors that could (also) potentially affect order execution quality. In electronic market settings, data transfer limitations and transmission slowdowns result in geographically dispersed electronic traders having different access to trading speed. For traders who act off of short-term information, longer wait times reduce (eliminate) their advantage and result in higher trading costs.

PIP Transactions, Price Improvement, Informed Trades and Order Execution Quality

Abstract This study focuses on innovations in order execution processes within the context of the Boston Option Exchange (BOX). More specifically, it examines the impact of the Price Improvement Process (PIP) on options quoted, effective and realised proportional spreads. We consider the PIP as a mechanism that allows the market maker to ‘internalise’ the transaction. We show that PIP transactions are associated with wider bid/ask proportional quoted spreads than non‐PIP transactions, in spite of the temporary narrowing of the effective proportional spread during PIP. We identify informed traders by focusing on the direction of trade. Using an original data set, we show that PIP transactions follow signals in the form of buy/sell orders by informed traders. We also show that PIP is a mechanism that allows the market maker to internalise a position in the same direction as that of the informed trader. We conclude that PIP does not improve the efficiency of the market but simply allows the market maker to benefit at the expense of uninformed traders.

Intraday time and order execution quality dimensions

We examine intraday execution quality patterns on Nasdaq stocks using proprietary order-level data from a US broker dealer. Orders submitted midday execute slower than orders submitted around the open and close. However, midday orders have lower execution costs. Our results indicate that execution speed and execution cost exhibit offsetting intraday time-dependent patterns and these patterns appear to be induced by variations in informed trading levels. While some traders concentrate their trading activity around the open and close, others prefer to trade midday. Traders have varying preferences for when to trade, and offsetting patterns exist between speed and cost. These factors highlight the complexity in defining an optimal trading time, which, among other things, is dependent on the dimensional preferences of individual traders.